ECB Seeks to Shed ‘Uncomfortable’ Bond-Buying Duty: Euro Credit

ECB President Jean-Claude Trichet supports the European Financial Stability Facility taking on the task of capping yields. Photographer: Hannelore Foerster/Bloomberg

Feb. 3 (Bloomberg) -- The European Central Bank is eager
for Europe’s rescue fund to take responsibility for buying
government bonds. Germany, though, may resist the switch.

“The ECB has always been uncomfortable with the purchases
and it really wants out now,” said James Nixon, a former ECB
forecaster who now works as co-chief European economist at
Societe Generale in London. “It wants to go back to the day job
of keeping a lid on inflation, and the program is starting to
interfere with its monetary policy operations.”

ECB President Jean-Claude Trichet supports the European
Financial Stability Facility taking on the task of capping
yields. The central bank has spent 76.5 billion euros ($106
billion) buying the debt of Europe’s most-distressed nations.
The EFSF, though, lacks the legal authority to purchase debt,
according to a German government official who briefed reporters
yesterday ahead of a Feb. 4 summit meeting.

Central bankers are pushing governments to take more
responsibility for solving Europe’s debt crisis, seeking to
scale back emergency measures that risk stoking inflation.
Germany wants to make additional bailout efforts conditional on
stricter control of countries’ finances, according to four
officials involved in bailout talks who declined to be
identified because the deliberations are private.

‘Bargaining Chip’

“Germany, as Europe’s paymaster, can use the EFSF bond
purchases as a bargaining chip to put pressure on the periphery
countries to get their house in order,” said Nicolas Doisy, a
former French Treasury official who now works at CA Chevreux in
Paris. Germany “can twist Spain’s or Portugal’s arm more than
the ECB ever could, because you’d have governments talking to
governments and that will also help drive down spreads.”

Europe’s leaders are debating how to expand the 440
billion-euro rescue fund. Greek Finance Minister George
Papaconstantinou said yesterday he’s confident of reaching a
“comprehensive” agreement next month. “The current market
situation is one of expectations,” Papaconstantinou said. “It
would be a big mistake to conclude an agreement that falls short
of these expectations.”

In the past three weeks, four ECB policy makers and private
sector executives including Deutsche Bank AG’s Chief Executive
Officer Josef Ackerman have backed the mooted EFSF bond-purchase
plan. French Finance Minister Christine Lagarde said the
decision is “better left to finance ministers than bankers and
advisers.”

Mission Creep

“The list of demands on what the EFSF should do is getting
longer and longer, and it may simply not be big enough to
facilitate all those,” said Juergen Michels, chief euro-area
economist at Citigroup Inc in London. “Let’s not forget that
the original remit was to make the fund bigger so it could bail
out Spain if needed. While the ECB demands may be valid, the
fund may not be big enough.”

Bonds have rallied this week on investor optimism that the
aid package will expand by enough to halt the debt crisis.
Spain’s 10-year yield has declined to about 5.07 percent from
5.45 percent, while Portuguese yields have dropped more than 20
basis points to 6.82 percent. The premium investors demand to
own Greek debt rather than German bunds has dropped to a three-month low of about 760.

The ECB started buying government bonds in May, an
unprecedented move that drew criticism from council members Axel
Weber and Juergen Stark, who said supporting the market for too
long could fuel price increases and let profligate nations off
the hook.

Inflation Drain

To stop its purchases boosting money supply and stoking
inflation, the ECB each week drains the liquidity created by
offering banks seven-day term deposits. This week, it failed to
fully neutralize the liquidity created by its bond purchases for
the third time since the program began.

Last month, Trichet stepped up his inflation-fighting
rhetoric after December inflation unexpectedly exceeded the
bank’s 2 percent limit for the first time in more than two
years. It accelerated to 2.4 percent in January. He may
reiterate calls for the EFSF to buy bonds at a press conference
today in Frankfurt following the monthly policy meeting.

Central bank funding is becoming “more sharply skewed
toward a handful of addicted banks” which can’t obtain money-market funding, said Nixon at SocGen. The ECB’s sterilization
over the past two weeks left “the money markets short of
funds” Nixon said, pushing up overnight borrowing rates to 1.31
percent on Feb. 1, the highest since June 2009.

Shifting the source of bond purchases may not underpin the
fixed-income market. The buybacks haven’t “reined in spreads to
any sufficient degree,” said Christoph Rieger, head of fixed
income strategy at Commerzbank AG in Frankfurt. “The market
doesn’t really gain that much, since the EFSF has to go and
raise the funds while the ECB can use central bank money.”